The numbers on SpaceVest, for example, are not great for the initial fund it launched in 1995. It's listed as having a negative 14.8 percent rate of return as of June 2003. But SpaceVest's second fund, which began investing in 1999, boasts a return rate of 59 percent as of March 2003. The numbers are put into perspective by listing the "benchmark" rate of return, meaning the average of other venture funds that made their first investment that year in the United States: 63.6 percent for 1995 and negative 23.3 percent for 1999. So SpaceVest's first fund did even worse and the second fund did even better, compared with other funds. Higginbotham confirms those numbers are right for the period stated, but claims the first fund is now breaking even and the second one has risen to an 80 percent rate of return.
Peter Barris, Reston-based managing general partner of the largest venture capital firm in the area, New Enterprise Associates of Baltimore, which is listed in O'Hare's book as one of the world's best performers, says this is a difficult subject. "Arguing against transparency is like arguing against motherhood," he says. But the issue is damaging to his industry, Barris says, because it is forcing venture capitalists to do business differently. "It is called private equity," he says. The Carlyle Group in Washington was the only other local firm in the book's listing of top global performers.
Barris cautions against comparing returns from different firms because some value companies differently from others. "When you just disclose these numbers you don't know what's under the cover," Barris says. "It's dangerous information in the wrong hands."
In fact, the numbers were something most venture capitalists refused to talk about. Bill Dixon, a spokesman for Friedman, Billings, Ramsey Group of Arlington, said the company does not disclose venture capital fund performance numbers. Columbia Capital's Fleming says the numbers in the Private Equity Performance Monitor are "not meaningful."
Grotech's Adams says it's part of his agreement with investors to not disclose financials. "We try to establish a relationship of trust and we say, 'By the way, we'll keep it to ourselves,' " Adams says.
Venture capitalists are trying some new ways of hanging on to secrecy. Some of Grotech's investors, worried that the firm won't be able to protect the information, have started asking that their names be taken off documents that could eventually reach the public, Adams said. They don't want the world to know their personal investment strategies or the results. Adams has complied, substituting anonymous numbers for names.
Higginbotham also has begun changing practices at SpaceVest. Now, even though investors sign confidentiality agreements, they are given only summaries of individual company performance rather than more specific breakdowns of financials or information on proprietary research and development. Fleming says Columbia Capital hasn't yet changed anything formally, but its partners are being more careful about what they disclose to their investors. "Everybody in the industry is thinking about this," he says. "It's a work in progress."
Shannon Henry writes about Washington's technology culture every other Thursday. Her e-mail address is henrys@washpost.com.
